What is Positional Trading?

Positional trading is a medium- to long-term investment strategy where investors hold positions for weeks or months, and sometimes even longer. This is different from swing trading or day trading, where the focus is on short-term returns. Here are some key points worth noting in this regard: 

• Positional trading focuses on capturing big price movements over long periods. Traders who use this method of trading use a mixture of technical and fundamental analysis. They consider the financial health of the company and different macroeconomic trends while also using technical charts to identify entry and exit points. 
• These traders are less concerned about intraday volatility and analyse overall market direction. This method is suitable for traders who do not have the time to monitor day-to-day market performance. 
• Positional trading provides a balance between long- and medium-term returns. Positional trading entails lower transaction costs, thanks to the lower number of transactions conducted. 

Time Horizon and Objectives

Here are some insights on the time horizon and objectives. 

• Positional trading is usually over a medium to long-term period, which can range from a few weeks to a few months. 
• The main objective is to capitalise on major market trends, which can include both upward and downward trends. 
• Day traders make multiple trades on a single day. However, positional traders wait for the capital market to reach their goal and then trade. Their main aim is to catch large market shifts to gain higher profits. 
• This trading is effective for people who are not present in the market every day and can balance between long-term trading and active trading. 

Types of Positional Trading

Positional trading can be of different types:

Futures and options positions

In this method, the traders use derivative instruments to hold the trade for some time (up to 3 months). These trades are risky but can provide higher returns. 

Long-term equity holding

This includes buying fundamentally strong stocks. The traders are expecting capital appreciation over the months. 

Thematic trading

Here, the traders take a position based on market trends. This can be based on recent developments like investment in renewable energy, advanced technologies, etc. The aim is that in the long run, these trades will provide higher returns. 

How to Select Stocks for Positional Trading

Here is a guide to choosing stocks for positional trading: 

• Selecting the right stock is very important when it comes to positional trading. A trader can use a selection strategy that is based on both quantitative and qualitative judgements.

• The first focus should be to identify sectors that have showcased higher returns over the last few months. 
• Use proper screening applications to screen stocks and find the ones that are suitable for your interests and long-term goals.
• It is better to choose stocks that have shown a positive historical result. This can be both an upward or downward trend, but it has to be promising for the trader to choose
• A trader should confirm that the stock has adequate daily volume to ensure smooth entry and exit points.

Technical + Fundamental Analysis Approach

The most effective positional traders employ a combination of technical and fundamental analysis:

1. Fundamental Analysis

Company performance-oriented:

• Revenue growth
• Profitability
• Debt-to-equity ratio
• Competitive advantage (moat)
• Management quality
• This assists in establishing if a stock is worth holding in the long run.

2. Technical Analysis

• Employed to ascertain the timing of entry and exit
• Moving Averages (50, 200-day) to recognise trends
• MACD and RSI to recognise trend signals of momentum
• Support and resistance points for setting the target and stop loss
• Volume analysis to affirm breakout or trend continuation.

For instance, if a strong fundamental stock breaks out above resistance with heavy volume, it is a buy signal. Conversely, if a weak fundamental stock breaks support, it could be a candidate for shorting. 

Risk Management

Managing risks in positions, trading is non-negotiable. This type of trading is held for a longer period and is exposed to more market changes. Some of the strategies that can be used to manage risks include: 

Stop loss

It is advisable to opt for a stop-loss option. The trader can place the stop loss at 5*10% below the invested amount. This will ensure that the stock is sold if the price falls below this stage. This will protect capital in case of sudden market changes. 

Diversification

It is always better to put capital into more than one stock to reduce the risk of losing all your money at once. This will reduce market risks and potentially optimise returns in the long run. Traders should allocate stocks based on different factors like the overall exposure of a sector to market risks, the volatility of the stock, and investor confidence in the stock market. 

Risk-reward ratio

Positional trading is for people who can be patient and not indulge in overtrading. The traders need to determine the risk and reward ratios to ensure that even if they are generating losses in the short run, the long-term returns are sufficient. 

Differences from Swing/Day Trading

Positional trading is very different from swing and day trading as regards time horizon, strategy, and risk exposure. While positional trading involves holding securities for several weeks or months to take advantage of long-term trends, swing trading usually ranges from a few days to a fortnight, taking advantage of short- to medium-term price movements. 

Day trading, however, is selling and buying assets on the same trading day, depending largely on intraday volatility. Positional traders employ a mix of fundamental and technical analysis, while swing and day traders depend mainly on technical indicators. Moreover, positional trading demands less frequent checking and lower transaction costs. 

Tips for Beginners

It is always better to start with a small capital investment to reduce sudden losses. 

• It is better to avoid investing in penny stocks. These stocks are illiquid and highly volatile. It is good to stay with mid-sized or large-sized stocks to get higher returns.
• Traders should record every transaction. This will help them identify whether they are overtrading. This will help in reflecting and improving your moves. 
• Traders should not react emotionally and avoid making short-term profits.
• To profit from positional trading, traders should be aware of market trends and uncertainties. Traders need to read newspapers to get ideas about company performance and economic changes.

Sometimes you can opt for rollover of futures trading to switch a near-month contract closer to the expiration date with another contract whose expiry is in a later month. So, you can close your position in one contract and open a similar position in another contract with its expiry in a further-out month contract. The switch may be done far-month or mid-month, depending on the price of the rollover contract and liquidity. This enables the trader to extend the trading terms.